Introducing Economics

What do Economists Study?

 What do Economists Study?

!  Economic problems
!  production and consumption

!  Scarcity: the central economic problem

!  defining scarcity
!  use of resources (factors of production)
" labour
" land and raw materials
" capital

!  demand and supply

" importance of reconciling demand and supply
" actual and potential demand and supply
 What do Economists Study?

!  Macroeconomic issues

!  growth

!  unemployment

!  inflation

!  balance of payments problems

!  cyclical fluctuations
 What do Economists Study?

!  Microeconomic issues
!  choices: what, how and for whom
!  the concept of opportunity cost
!  rational economic decision making
" marginal costs and marginal benefits
" MC > MB → do more
" MC > MB → do less

!  microeconomic objectives
" efficiency
" equity
 What do Economists Study?

!  The production possibility curve

!  what the curve shows
 A production possibility curve
Units of food (millions)

Units of clothing (millions)

 A production possibility curve
a
Units of food (millions)

Units of clothing (millions)

 A production possibility curve

b
Units of food (millions)

Units of clothing (millions)

 A production possibility curve

c
Units of food (millions)

Units of clothing (millions)

 A production possibility curve
Units of food (millions)

Units of clothing (millions)

 A production possibility curve
Units of food (millions)

Units of clothing (millions)

 A production possibility curve

w
x
Units of food (millions)

Units of clothing (millions)

 What do Economists Study?

!  The production possibility curve

!  what the curve shows

!  microeconomics and the production possibility

curve:
 What do Economists Study?

!  The production possibility curve

!  what the curve shows

!  microeconomics and the production possibility

curve:
" choices and opportunity cost
 Increasing opportunity costs

x
Units of food (millions)

1 y
1

Units of clothing (millions)

 What do Economists Study?

!  The production possibility curve

!  what the curve shows

!  microeconomics and the production possibility

curve:
" choices and opportunity cost
" increasing opportunity cost
 Increasing opportunity costs

x
Units of food (millions)

1 y
1

z
1

Units of clothing (millions)

 What do Economists Study?

!  The production possibility curve

!  what the curve shows

!  microeconomics and the production possibility

curve:
" choices and opportunity cost
" increasing opportunity cost

!  macroeconomics and the production possibility

curve:
 What do Economists Study?

!  The production possibility curve

!  what the curve shows

!  microeconomics and the production possibility

curve:
" choices and opportunity cost
" increasing opportunity cost

!  macroeconomics and the production possibility

curve:
" production within the curve
 Making a fuller use of resources

x
Production inside
Food

the production y
possibility curve

O
Clothing
 What do Economists Study?

!  The production possibility curve

!  what the curve shows

!  microeconomics and the production possibility

curve:
" choices and opportunity cost
" increasing opportunity cost

!  macroeconomics and the production possibility

curve:
" production within the curve
" shifts in the curve
 Growth in potential output
Food

Now

O
Clothing
 Growth in potential output

5 years’ time
Food

Now

O
Clothing
 Growth in potential and actual output
Food

O
Clothing
 Growth in potential and actual output

y
x
Food

O
Clothing
 What do Economists Study?

!  The circular flow of income

!  firms and households
The circular flow of goods and incomes
 What do Economists Study?

!  The circular flow of income

!  firms and households

!  goods markets
" real flows: goods and services
The circular flow of goods and incomes
Goods and services
 What do Economists Study?

!  The circular flow of income

!  firms and households

!  goods markets
" real
flows: goods and services
" money flows: consumer expenditure
The circular flow of goods and incomes
Goods and services

£
Consumer
expenditure
 What do Economists Study?

!  The circular flow of income

!  firms and households

!  goods markets
" real
flows: goods and services
" money flows: consumer expenditure

!  factor markets
 What do Economists Study?

!  The circular flow of income

!  firms and households

!  goods markets
" real
flows: goods and services
" money flows: consumer expenditure

!  factor markets
" real flows: services of labour and other factors
The circular flow of goods and incomes
Goods and services

£
Consumer
expenditure

Services of factors of production (labour, etc)

 What do Economists Study?

!  The circular flow of income

!  firms and households

!  goods markets
" real
flows: goods and services
" money flows: consumer expenditure

!  factor markets
" real
flows: services of labour and other factors
" money flows: wages and other incomes
The circular flow of goods and incomes
Goods and services

£
Consumer
expenditure

Wages, rent
dividends, etc.
£

Services of factors of production (labour, etc)

 What do Economists Study?

!  The circular flow of income (cont.)

!  macroeconomic issues
" the size of total flows
!  microeconomic issues
" individual
markets
" choices within goods and factor markets
Introducing Economics

Economic Systems
 Economic Systems

!  Classifying economic systems

!  methods of classification

!  classification by degree of government control

 Classifying economic systems

Totally Totally
planned free-market
economy economy
 Classifying economic systems

Mid 1980s

N. Korea China UK Hong

Cuba Poland France USA Kong
Totally Totally
planned free-market
economy economy
 Classifying economic systems

Mid 1980s

N. Korea China UK Hong

Cuba Poland France USA Kong
Totally Totally
planned free-market
economy economy
N. Korea Cuba China Poland France USA
UK China
(Hong
Kong)

Early 2010s
 Economic Systems

!  Classifying economic systems

!  methods of classification

!  classification by degree of government control

!  other methods of classification

!  The command economy

!  features of a command economy

!  planning:
" consumption and investment
" matching of inputs and outputs
" distribution of output
 Economic Systems

!  Advantages of a command economy

!  high investment, high growth

!  stable growth

!  social goals pursued

!  low unemployment

!  Problems of a command economy

!  problems of gathering information

!  expensive to administer

!  inappropriate incentives

!  shortages and surpluses

 Economic Systems

!  The free-market economy

!  demand and supply decisions

!  the price mechanism:

" shortages and surpluses
" equilibrium price
" response to changes in demand and supply
 The price mechanism:
the effect of a rise in demand

Goods Market
Sg↑
Dg↑ shortage Pg↑ until Dg = Sg
(Dg > Sg) Dg↓
 The price mechanism:
the effect of a rise in demand

Goods Market
Sg↑
Dg↑ shortage Pg↑ until Dg = Sg
(Dg > Sg) Dg↓

Factor Market
Sf ↑
Sg↑ Df ↑ shortage Pf ↑ until Df = Sf
(Df > Sf) Df ↓
 Economic Systems

!  The free-market economy

!  demand and supply decisions

!  the price mechanism:

" shortages and surpluses
" equilibrium price
" response to changes in demand and supply

!  the interdependence of markets

 The price mechanism:
the effect of a rise in demand

Goods Market
Sg↑
Dg↑ shortage Pg↑ until Dg = Sg
(Dg > Sg) Dg↓

Factor Market
Sf ↑
Sg↑ Df ↑ shortage Pf ↑ until Df = Sf
(Df > Sf) Df ↓
 Economic Systems

!  Advantages of a free-market economy

!  transmits information between buyers and sellers

!  no need for costly bureaucracy

!  incentives to be efficient

!  competitive markets responsive to consumers

 Economic Systems

!  Problems of a free-market economy

!  competition may be limited: problem of market

power

!  inequality

!  theenvironment and other social goals may be

ignored

!  The mixed economy

 Introducing Economics

The Nature of Economic Reasoning

 The Nature of Economic Reasoning

!  Economics as a science
!  models in economics

!  building models

!  using models

!  assessing models

!  Economics as a social science

!  difficulties in conducting controlled experiments in
many parts of the subject
!  problems of predicting human behaviour

!  behavioural economics
 The Nature of Economic Reasoning

!  Economics and policy

!  positive and normative economics

!  the role of the economist in policy making

!  the use and abuse of economics